what do you think of this Denver downtown MFH

Question

Everyone says Denver market is over priced, but this one looks pretty good to me... Am I wrong?

http://www.loopnet.com/Listing/20412666/1266-Lafay...

Account Closed · Answer

@Hersh M., you're correct that I'm active in my market. My partner and I review off-market deals on a weekly basis sending to us from various brokers. After a while, we can eyeball a deal to give it a thumb up or down. We normally let the broker/agent know within 24 hours if the deal is a yea or a nay. We don't like to waste their time because they have a business to run.

Although we always waive our financing and appraisal contingencies, we have never paid all cash for any of our deals. Most of our deals are financed with 75% LTV from the get go regardless if the building is performing or not. Of course it takes time to get to this level.

@Diane G., my goal is to get a close group of friends to get off their W2 ASAP. There are 6 of us in the group chat, and we're texting each other almost on a daily basis. Each of us has our specialty and can help each others fill in the voids.

I'm the lead guy when it comes to multifamily while one member is a trustee sale buyer/flipper; one person is a HML; one person works for the Federal Reserve and shares with us which bank offers which loan products, and how hard we can push to get the rate and terms we want; the other two persons are hi-tech employees making what is considered (HENRY) in the banking industry.

With respect to being able to buy cheaper in 1-3 years from today, you might be right. I used to be in your shoes due to the lack of knowledge. I waited 10 years before jumping into the market in 2009. Had I possessed the knowledge I have now, I wouldn't have wasted 10 years waiting.

Let's put it this way. If you could buy a deal today at 75-80% FMV, would you buy it, or would you wait for another 1-3 years to buy?

I've been buying every year since 2009 including this year 2017 with the exception of 2010 where I stayed home and took care of our first born daughter. On the other hand, I've been selling in 2015, 2016, 2017 and will likely be selling again in 2018 as well as buying if the right opportunity presents itself. I know people who sat out of the market since 2013 because they felt the market was getting too high then. I kept an open mind and continued to plow forward when the picking was slim, and it has paid huge dividend. Time in the market is as important as timing the market. Buying right can aliviate a lot of downside risks.

As I mentioned before, I'll buy for the right price and I'll sell for the right price regardless of where we are in the cycle of the housing market. People will sell when they have to sell and will buy when they have to buy so the opportunity is always there. Why let the market dictate us? We can dictate our own destiny you know.

Best of luck.

Account Closed · Answer

@Diane G.,

As you already have seen from your friend's experience, not all off-market deals are good deals. It's the agent's job to make the numbers look as rosy as possible to get the highest price for the seller.

Based on my experience, all pro-forma numbers are BS. It's your job as a buyer to run your own analysis and come up with your own cap rate and purchase price.

Looking at current cap rates is for rookies. I don't care what the current cap rate is. I look at what it could be once I stabilized it. As they say in hockey: A good player goes where the puck is while a great player goes where the puck will be.

My partner and I bought a 6-unit building in San Jose for $1.175M with a gross rent of $7,250 and a cap rate of 3.7%. Within 3 months, we semi-stabilized it and brought it to $9,400/mo. Did a cash-out refi and the value came back at $1.5M. Just over a year later, it's doing $12k/mo and still has another $1.6-$2k upside. Got a $2M offer on it last month, but my partner turned it down. This building is starting to mint some serious cash. That's how lucrative our market is. Why bother going elsewhere?

You're sitting on a goldmine here. Spend sometime to figure out the market and capitalize on it. Don't you consider yourself an incidental millionaire by owning real estate in the Bay Area? Why abandon the market that has treated you so well?

Just my 2 cents of course. 😉

Diane G. · Answer

Stop Account Closed....

I was laid off from my previous company last year, and finally got my severence check of $515K for my 11 months of service... Lol

Been looking locally but found nothing... If you know of deals that you are not interested in, pass them down stream to me.....Lol

Hersh M. · Answer

@Diane G. Are you active or passive investor? From what I understand Account Closed is highly active. :) Just 2 different approaches.

Account Closed · Answer

Diane,

I just did, but not to you unfortunately.  🙈

There's a line ahead of you. I recently passed a 12-unit deal to my neighbor who I met on BP. I've been doing volunteer work with her hubby, but didn't know she's interested in real estate. We met each other during a vonlunteet party and she was able to put the 2 and 2 together. I wasn't sure what to say when she asked me if I'm the Minh Le on BP. 😜

They own rentals in Arizona where they bought during the downturn so they're doing alright in that regard. They upgraded their first home along way and kept their first home as a rental here in the Bay Area. You can say they're accidental millionaires, but they're not. They're smart individuals and make huge salaries at their companies.

I've shared deals with her and some other BP friends for about 2 years  now. She passed on some deals and regretted shortly after. Well, not this time. She got a decent deal in a great location for a fair price with some upside. It's scheduled to close on 8/8, but looks like it may end up closing next week. Appraisal came in $50k above contract price. Unheard of isn't it? 😂

Congrats on your lay-off. $515k for a severance package after 11 months of working there? They can fire me anytime then. Unfortunately, I don't have a job so I can't be fired. Sigh...

Bill S. · Answer

@Diane G. since you asked, here are my thoughts.

1) It's on loopnet. Don't really need to say more. It is listed by one of the top brokerages for MF in the area. If it was a good deal it would be gone. They have more buyers than sellers. I get calls from them each month to sell my properties. All quick, easy, cash, etc. I get they are in the business of listing properties but this is way beyond reasonable.

2) I opened the link to the property brochure so will comment on the proforma and assumptions. The same brokerage has a unit one block away listed for rent on Craigslist. It's a one bed of 550 sqft at $975 per month. The finishes in CL ad seem better than the unit in the brochure. Here is the link so you can check it out yourself. I call BS on $1,250 for low to mid grade 550 sqft 1 bed in Capital Hill. I don't think rents on older units have reached $2 per sq ft yet. IMO their income projections are inflated.

3) Ok let's say you shot for the $1,250 per month for your 1 bd units. No way you will land at 3% vacancy rate. Market rate is something like 6% now. I realize that you should be able to do better in the older cheaper properties and price points but you can't get the projected high rents and have low vacancy. Can't have your cake and eat it too.

4) I do like the idea of other income and they didn't provide enough information to determine if those amounts are inflated like the rents are. If you inflate the income on one item, then all are suspect.

5) Taxes are stated to remain the same for the property in the proforma. The current building valuation is at about $550,000 which is arguably low. Next round of valuation will be at or near the sale price. Property taxes will likely double.

6) Management at 6.5% of Gross rent. Not sure where that comes from. The quoted prices I have seen around town are 10% of gross plus 1 month rent on turn over. The best I've been quoted was 7% of gross and half of first month's rent on turn over. Since the Proforma rents are double current rent you will likely have complete turnover in the first year. I can't see an experienced property manager taking on this project for the proforma management fee. Perhaps the selling agent will do it for that put they will be losing money on it if they do.

7) They are estimating the same amount for repairs (existing vs proforma) but the property is listed as a "value add" property. Value add typically means it needs work to bring it to condition to get market rents. Perhaps that would be in their Cap Ex set aside amount.

8) There is no Cap Ex on the proforma. On a building this age that's listed as a "value add" this is complete fantasy.

I don't know what the numbers should be but they are not what the agent is showing. I could come up with numbers but it's not worth the exercise to me because it's so far from what is being asked. It's unlikely that we could come to some sort of agreement.

Matt M. · Answer

I don't think it looks good, but I regularly look at "income" properties on the MLS. This one is listed on REColorado too.

I agree with @Bill S. as usual.

what do you think of this Denver downtown MFH

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